Sony PS3 could take years to break even

Sony's PS3 will debut to a different scenario than the PS2 saw, and increased …

Merrill Lynch Japan thinks it's in the know when it comes to both the retail cost of the PlayStation 3, and the manufacturing cost. According to Toyo Keizai, the investment firm is saying that the PS3 is going to cost roughly US$494 to manufacture, but will retail for about $100 less, at the $399 price point. We've previously suggested that this would be the ideal price point for Sony, although it's hard to know what Ken Kutaragi means when he says that the PS3 will be expensive. The fact of the matter is that the success of the Xbox 360 (or lack thereof) will probably have as much to do with the pricing of the PS3 as its manufacturing cost.

Given that Sony's PS3 will face stiff competition from Microsoft's Xbox 360, the chances that Sony will release its console at its production cost is slim. Under the assumption that the Xbox 360 is expected to sell at around $299, Merrill Lynch Japan predicts that Sony will sell each PS3 at the price of 44,800 yen ($410) in Japan and $399 in America. That would mean Sony would suffer a loss of more than 130 billion yen ($1.18 billion) during the first year of the PS3's release.

The real issue for Sony, however, is timing. The company has sunk billions and billions of dollars into the PS3, including nearly US$2 billion on the Cell processor alone. And while the company has proven itself capable of turning around and making big profits on big expenditures with the PS2, this time the situation could play out differently. Microsoft's Xbox 360 has come to market first, and there are questions as to when the PS3 would hit shores in North America and Europe. Currently a Japanese launch in the spring is expected, but it could be several months before we see units stateside.

If there is a long period of time between the Japanese launch and the North American launch, Microsoft may have a price advantage. If the PS3 doesn't arrive in North America and Europe until just before the holiday season of 2006, then Sony's PS3 could be met with a price reduction for the Xbox 360. This could make the first few years of the PS3's lifespan tougher than what its younger sibling had to face. Merrill Lynch Japan thinks that such a scenario could results in a second-year loss of $730 million, and another loss of $457 million in its third year. This is in contrast to the PS2, which was profitable in its second year, to the tune of $757 million.

But Ken Kutaragi isn't worried, because he thinks the company is going to roll out a product that will make you want to take extra shifts at work to pay for it.

"When Nintendo was selling its 16-bit machine at around 12,500 yen ($114), we sold the first PlayStation at 39,800 yen ($364)," continued Kutaragi. "The press was saying that it was expensive, but it was a huge hit. It's the same thing with the PlayStation Portable from last year. The Game Boy Advance is a same handheld gaming machine, and it costs less than 10 thousand yen ($91). On the other hand, our PSP had cost 25,000 yen ($229). But people lined up overnight to buy it, and it sold out on the day of its launch. It all depends on whether people want it. Of course, I'm confident that the PS3 is a product that people will definitely want."

Kutaragi and friends are definitely expecting the PS3 to look like a good buy when they tout all of its features. The company will not only emphasize increased gaming power, but they'll also beat the Blu-ray drum endlessly, selling the PS3 as a combo HD gaming and HD movie-viewing device. The company hopes that many consumers will feel like they can kill two birds with one stone by purchasing the PS3, and they're apparently going to enter into a war of words with Microsoft. Sony Computer Entertainment Worldwide Studios president Phil Harrison recently tried to douse water on Microsoft's "HD era" claims by saying that "true HD" wouldn't come before the PS3, although his claims were dubious at best.

And behind the cacophony of next-gen, big-ticket chest thumping, there's Nintendo, who's hoping to undercut both of these players with a cheaper console aimed at a wider demographic. Picture November 2006: a possible $299-349 Xbox 360 (premium), a $200 Nintendo Revolution (I don't buy the $149 rumors), and a $399 PS3. Those prices might shift a bit, but you get the idea.

Ken Fisher / Ken is the founder & Editor-in-Chief of Ars Technica. A veteran of the IT industry and a scholar of antiquity, Ken studies the emergence of intellectual property regimes and their effects on culture and innovation.